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Pensions – The Earnings Cap

With so many changes already being proposed to pensions over the next tax year (eg. stakeholder pensions, new defined contribution tax regime and pension sharing) it is something of a relief that the only direct change affecting pensions is the increase in the earnings cap. There are, however, a considerable number of pensions sales opportunities over the next tax year.



A number of directors will have a keen interest in reducing both corporation tax (and also employer&#39s National Insurance) and personal levels of income tax. In particular a number may enjoy a high level of earnings that exceed the earnings cap. The Chancellor has announced that the earnings cap will increase to £91,800 for 2000/2001.



For the director of a private limited company who is not subject to the earnings cap (or whose earnings are below the cap), approved pension schemes offer virtually unrivalled tax planning opportunities. Where substantial contributions are envisaged and there is a desire for the director/member to exercise some control over the underlying investments of a scheme, a SSAS can look a very attractive option. In particular, provided the PSO investment guidelines and limits are adhered to, the scheme can invest in commercial property or could make a loan, at commercial rates of interest, to the employer company. A SSAS member may also retain considerable flexibility over benefit payments as he/she will normally not be required to purchase an annuity until age 75 and may be able to take advantage of annuity deferral or income withdrawal payments in the meantime.



A SSAS is permitted to buy commercial property from the employer company (provided this was not owned by a scheme member in the previous 3 years). However, frequently one drawback to the SSAS acquiring property from the employer company is that this may then crystallise a corporation tax charge on any capital gains then arising. Capital gains tax roll-over relief may be available but, if not, it is unlikely that a company would wish to pay such a tax liability even though future capital gains within the pension scheme will be tax free. For companies who have been concerned with this potential tax charge in the past, now may be a good time to consider transferring property to the fund.

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